Question

Calculating Average Operating Assets, Margin, Turnover, Return on Investment (ROI)

Forchen, Inc., provided the following information for two of its divisions for last year:

	Small Appliances Division	Cleaning Products Division
Sales	$34,670,000	$29,000,000
Operating income	2,773,600	1,160,000
Operating assets, January 1	6,394,000	5,600,000
Operating assets, December 31	7,474,000	6,000,000

Required:

1. For the Small Appliances Division, calculate:

a. Average operating assets	$ fill in the blank 1
b. Margin	fill in the blank 2	%
c. Turnover	fill in the blank 3
d. Return on investment (ROI)	fill in the blank 4	%

2. For the Cleaning Products Division, calculate:

a. Average operating assets	$ fill in the blank 5
b. Margin	fill in the blank 6	%
c. Turnover	fill in the blank 7
d. Return on investment (ROI)	fill in the blank 8	%

3. What if operating income for the Small Appliances Division was $1,733,500? How would that affect average operating assets? Margin? Turnover? ROI? Calculate any changed ratios. When required, round the percent to four decimal places before converting to a percentage. For example, .88349 would be rounded to .8835 and entered as 88.35. Enter "0", where ever required.

Average operating assets		by fill in the blank 10%
Margin		by fill in the blank 12%
Turnover		by fill in the blank 14%
Return on investment (ROI)		by fill in the blank 16%

Answer 1

Answer of Requirement 1-a:

Average Operating Assets = (Beginning Operating Assets + Ending Operating Assets)/2
Average Operating Assets = ($6,394,000 + $7,474,000)/2
Average Operating Assets = $6,934,000

Answer of Requirement 1-b

Margin = Operating Income / Sales *100
Margin = $2,773,600 / $34,670,000 *100
Margin = 8%

Answer of Requirement 1-c:

Turnover = Sales / Average Operating Assets
Turnover = $34,670,000 / $6,934,000
Turnover = 5 times

Answer of Requirement 1-d:

Return on Investment = Margin * Turnover
Return on Investment = 8% *5
Return on Investment = 40%

Answer of Requirement 2-a:

Average Operating Assets = (Beginning Operating Assets + Ending Operating Assets)/2
Average Operating Assets = ($5,600,000 + $6,000,000)/2
Average Operating Assets = $5,800,000

Answer of Requirement 2-b

Margin = Operating Income / Sales *100
Margin = $1,160,000 / $29,000,000 *100
Margin = 4%

Answer of Requirement 2-c:

Turnover = Sales / Average Operating Assets
Turnover = $29,000,000 / $5,800,000
Turnover = 5 times

Answer of Requirement 2-d:

Return on Investment = Margin * Turnover
Return on Investment = 4% *5
Return on Investment = 20%

Answer of Requirement 3:

There would be no effect no average operating assets due to change in operating income

Margin = Operating Income / Sales *100
Margin = $1,733,500 / $34,670,000 *100
Margin = 5%

The margin will be decrease by 3% due to change in operating income

There will be no change in turnover due to change in operating income

ROI = Margin * Turnover
ROI = 5% * 5
ROI = 25%

The ROI will be decrease from 40% to 25% due to change in operating income.